1
Q
CAPM Definition
A
equation that shows the relationship between risk and expected return of a security in equilibrium
2
Q
Assumptions of CAPM
A
Individual Behavior: rational mean-var optimizers
Market structure: all assets publicly traded, no taxes, no transaction costs
3
Q
SML definition
A
Graph between E(r) and Beta
positive alpha is above SML
4
Q
Difference between SML and CML
A
- CML: graphs risk premiums of efficient portfolios as a function of σ
- SML: graphs risk premiums of individual assets as a function of β
5
Q
List extensions of shortcomings of the CAPM
A
Zero Beta CAPM w/ non traded assets & labor income Multiperiod CAPM Consumption based CAPM CAPM w/ liquidity adjustments
6
Q
Market price of risk formula
A
( E(rm)-E(rf) )/var(m)
